The Fund's modified duration was unchanged at 0.1 years as the holding of floating rate notes was unchanged. Holding of floating rate notes will benefit the Fund when interest rates eventually increase as indicated by the SARB in the MPC meeting. The current yield of the Fund is higher than that of a money market fund.

The bond market reversed most of the gains made during the year as yields continued to move higher following a deteriorating backdrop both locally and internationally in terms of expectations on rate increases. The All Bond Index (ALBI) returned -1.4% during the second quarter of 2015. The 10 year benchmark yield opened the quarter at 7.80% and tracked higher to end the second quarter at 8.28%, although the high for the quarter was 8.47%.

For the quarter under review the repo rate was unchanged at 5.75%, however, the SARB Governor has indicated that the next move in the repo rate is up. This is despite economic growth slowing to a mere 1.3%qoq in the three months to March 2015 (and expected to be no more than 2% for the year 2015), unemployment rising to the highest rate in 12 years at 26.4% and consumer confidence for the second quarter printing at its worst level in 14 years. The inflation profile remains of concern, and with inflation seen breaching the 6% upper end of the target range in the first quarter of next year and peaking at 6.8%, there is increasing pressure on the SARB to hike rates, with the Governor reiterating that low growth can't be solved by monetary policy alone. The drivers behind the inflationary pressures include the petrol price increases, wage increases higher than CPI inflation and Eskom electricity price increases. The latest decision by NERSA to not grant Eskom a further tariff increase of 12.6% is some relief for the inflation outlook albeit a temporary one as it is highly likely that Eskom will reapply for the increase.

A positive for the domestic economy was the affirmation of both S&P and Fitch rating agencies of South Africa's local and foreign currency ratings, ensuring that South Africa is still classified as investment grade. The South African sovereign debt spread has remained unchanged at 213 basis points, with an average for the quarter at 208 basis points. The outlook for bond yields will be intricately linked to international bond market movements and the domestic inflation trajectory. The deterioration in the inflation outlook will prevent bond yields going back to the lows seen in the first quarter of 2015. In the US, the Fed Governor Janet Yellen indicated that the Committee was on track to raise rates this year, however, she did emphasise that the pace of the hiking cycle and not the timing of the first hike was important. A US hike will place further pressure on Emerging Markets, particularly those with current account deficits such as South Africa.